AA Asks to Extend Deferral on Pensions

December 2, 2014

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American Airlines, fat with record-setting profits but also
confronting new demands from its pilot union, is asking members of Congress for
a holiday bonus. The airline, the world’s largest after its merger this year with
US Airways, is shopping proposed language for an amendment to a 2006 law that
would reduce its near-term obligations to its pension funds.

American spokesman John McDonald declined to comment about
the proposed language or to indicate which lawmakers the company has
approached. The company did confirm, however, it is seeking the changes
outlined in a draft amendment being passed around Capitol Hill.

Those changes would amend the Pension Protection Act of
2006. Congress included special terms for the then-struggling airline industry
to help prevent airlines from defaulting on billions of dollars in pension
obligations.

Those pensions are guaranteed by the taxpayer-funded Pension
Benefit Guaranty Corp., and lawmakers were eager to avoid a default. But five
years out from 9/11, many airlines were still struggling. Delta, for instance,
had filed bankruptcy in 2005 and profits were down throughout the industry.
Delta and some of its competitors had already frozen pension benefits for their
workers.

The law allowed those companies to defer some of the annual
contributions they were required to make to the pension funds for up to 17
years. It meant that the companies could in the meantime use billions of
dollars in cash to pay their bills, rather than sock the funds away for future
retirees.

Americans’ obligations under the law were different. Five
years ahead of its own bankruptcy in 2011, it was doing better than many of its
competitors. And it had not yet frozen its workers’ pension benefits.

As a result, it was allowed to defer some of its
contributions to its pensions as well as enjoy an added benefit. The law
allowed American’s accountants to assume a faster rate of growth for assets in
its pension funds, a move that meant it was required to set aside even less
cash each year to be in good standing with its pension obligations.

In return, though, American was required to make good on the
underpayments within 10 years, rather than 17 years. The company said in a 2013
filing with the Securities and Exchange Commission that the favorable terms for
funding its pensions will be missed when they expire.

Now the airline is seeking to amend the deal it struck in
2006 to extend that deadline by an additional seven years. That would put it
even with its competitors — with one caveat. It wants Congress to make the
change while allowing it to still use the more aggressive rate-of-growth
assumptions that have helped reduce what it must contribute to the funds each
year.

Congress returns from its Thanksgiving break this week. The
time to deal with large stand-alone bills will be hard to find, but members
will likely attach many smaller bills as riders to budget measures or other
must-pass bills.

American had proposed defaulting on its pensions while it
was initially negotiating with creditors during its recent bankruptcy. It
instead opted to freeze pension benefits tied to three of its four pensions.

But with its profits soaring in the wake of its merger, the
company has begun steadily re-investing in the pension funds. Over the summer,
it announced that by the end of this year, it will have contributed more than
$1 billion to the funds over the past years.